![](ValueWalk%20logo.png)
Proxy Fights
Cost U.S. Companies $4.8 Million On Average
Posted By:
Michael Ide
Posted date: September 10, 2014 12:26:18 PM
Proxy fights have cost US companies an average $4.8 million so far
this year according to the latest issue of
Activist Insight, with
management consistently outspending activists for anything above
micro-cap stocks in what
activist investors say is a classic case of misaligned incentives, but
partially just reflects the two sides different obligations
Management spends
more on proxy fights than activists
As
you would expect, the cost of a proxy fight goes up for both sides as
the market cap of the target company increases, but the jump small- to
mid-cap companies is still pretty striking, increasing almost
five-fold according to quarterly and annual reports. Activist Insight
points out that large-cap proxy fights are still pretty rare so the
sample size is small and the average could easily shift if large-cap
fights become more common.
The costs to activists also go up based on the size of the target
company, but not nearly as quickly. Going on proxy solicitation costs,
which both sides have to disclose,
activist investors are often
outspent by 2:1 or more.
“Defending irresponsibility requires a lot of effort,” says
Shareholder Forum chairman Gary Lutin, “but it will always be worth
spending whatever amount of other peoples’ money is required.”
That’s a cynical way to view the situation, but it’s not entirely
inaccurate either. Activist funds have a strong incentive to keep
costs under control so that the investment works out, while board
members playing defense in a proxy fight have more binary outcome that
doesn’t give them much reason to hold back. At the same time,
management has an obligation to give every shareholder the opportunity
to vote, and reaching out to a diverse group of institutional and
retail investors is labor
intensive and expensive. Activists only have to contact the handful of
institutional investors they think are likely to back them in the
coming vote. Experienced activists will also have more experience with
proxy fights and standing relationships with legal firms, PR, and
other professional service providers.
Proxy fights can
cause smaller companies to post losses
Even though the absolute cost goes down, small and medium-caps have to
consider the possibility that spending a few million on a proxy fight
will push them from black to red (to say nothing of micro-caps).
Activist Insight gives the example ValueVision Media Inc (NASDAQ:VVTV)
which spent $5.3 million unsuccessfully trying to fend of
Clinton Group, which spent
$800,000 to pick up four board seats and contributed to ValueVision’s
losses for the quarter.
Copyright © 2014 Valuewalk.com |
|